Chapter 1
Managerial Accounting and
the Business Environment
Solutions to Questions
1-1
A strategy is a game plan that enables a
company to attract customers by distinguishing
itself from competitors. The focal point of a
company’s strategy should be its target customers.
1-2
Customer value propositions fall into
three broad categories—customer intimacy, operational excellence, and product leadership. A
company with a customer intimacy strategy attempts to better understand and respond to its
customers’ individual needs than its competitors.
A company that adopts an operational excellence strategy attempts to deliver products faster, more conveniently, and at a lower price than
its competitors. A company that has a product
leadership strategy attempts to offer higher
quality products than its competitors.
1-3
A person in a line position is directly
involved in achieving the basic objectives of the
organization. A person in a staff position provides services and assistance to other parts of
the organization, but is not directly involved in
achieving the basic objectives of the organization.
1-4
The Chief Financial Officer is responsible
for providing timely and relevant data to support
planning and control activities and for preparing
financial statements for external users.
1-5
The three main categories of inventories
in a manufacturing company are raw materials,
work in process, and finished goods.
1-6
The five steps in the lean thinking model
are: (1) identify value in specific products and
services; (2) identify the business process that
delivers value; (3) organize work arrangements
around the flow of the business process; (4)
create a pull system that responds to customer
orders; and (5) continuously pursue perfection
in the business process.
1-7
Successful implementation of the lean
thinking model should result in lower inventories, fewer defects, less wasted effort, and
quicker customer response times.
1-8
In a pull production system, production
is not initiated until a customer order is received. Inventories are reduced to a minimum
by purchasing raw materials and producing
products only as needed to meet customer demand.
1-9
Some benefits from improvement efforts
come from cost reductions, but the primary
benefit is often an increase in capacity. At nonconstraints, increases in capacity just add to the
already-existing excess capacity. Therefore, improvement efforts should ordinarily focus on the
constraint.
1-10 Six Sigma is a process improvement
method that relies on customer feedback and
fact-based data gathering and analysis techniques to drive process improvement. The goal
is to reduce defect rates below 3.4 defects per
million.
1-11 The five stages in the Six Sigma DMAIC
Framework are (1) Define; (2) Measure; (3) Analyze; (4) Improve; and (5) Control. The goals
for the define stage are to establish the scope
and purpose of the project, to diagram the flow
of the current process, and to establish the customer’s requirements for the process. The goals
for the measure stage are to gather baseline
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
1
performance data related to the existing process
and to narrow the scope of the project to the
most important problems. The goal in the analyze stage is to identify the root causes of the
problems identified in the measure stage. The
goal in the improve stage is to develop, evaluate, and implement solutions to the problems.
The goals in the control stage are to ensure the
problems remain fixed and to seek to improve
the new methods over time.
1-12 If people generally did not act ethically
in business, no one would trust anyone else and
people would be reluctant to enter into business
transactions. The result would be less funds
raised in capital markets, fewer goods and services available for sale, lower quality, and higher
prices.
1-13 Corporate governance is the system by
which a company is directed and controlled. If
properly implemented, the corporate governance system should provide incentives for the
board of directors and top management to pursue objectives that are in the best interests of
the company’s owners and it should provide for
effective monitoring of performance.
1-14 Enterprise risk management is a process
used by a company to proactively identify the
risks that it faces and to manage those risks.
1-15 The stakeholder groups include customers, suppliers, stockholders, employees, communities, and environmental and human rights
advocates.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
2
Managerial Accounting, 13th Edition
Exercise 1-1 (5 minutes)
1. Line
2. Organization chart
3. Staff
4. Decentralization
5. Controller
6. Chief Financial Officer
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
3
Exercise 1-2 (20 minutes)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
strategy
Six Sigma
business process
corporate governance
enterprise risk management
manufacturing cell
stakeholders
constraint
nonconstraint
value chain
Corporate social responsibility
supply chain management
lean thinking model; pulls
customer value proposition
The Sarbanes-Oxley Act of 2002
non-value-added activity
Theory of Constraints
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
4
Managerial Accounting, 13th Edition
Exercise 1-3 (15 minutes)
If cashiers routinely shortchanged customers whenever the opportunity
presented itself, most of us would be careful to count our change before
leaving the counter. Imagine what effect this would have on the line at
your favorite fast-food restaurant. How would you like to wait in line while
each and every customer laboriously counts out his or her change? Additionally, if you can’t trust the cashiers to give honest change, can you trust
the cooks to take the time to follow health precautions such as washing
their hands? If you can’t trust anyone at the restaurant would you even
want to eat out?
Generally, when we buy goods and services in the free market, we assume
we are buying from people who have a certain level of ethical standards. If
we could not trust people to maintain those standards, we would be reluctant to buy. The net result of widespread dishonesty would be a shrunken
economy with a lower growth rate and fewer goods and services for sale at
a lower overall level of quality.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
5
Problem 1-4 (20 minutes)
1. Failure to report the obsolete nature of the inventory would violate the
IMA’s Statement of Ethical Professional Practice as follows:
Competence
• Perform duties in accordance with relevant technical standards. Generally accepted accounting principles (GAAP) require the write-down
of obsolete inventory.
• Prepare decision support information that is accurate.
Integrity
• Mitigate actual conflicts of interest and avoid apparent conflicts of interest.
• Refrain from engaging in any conduct that would prejudice carrying
out duties ethically.
• Abstain from activities that would discredit the profession.
Members of the management team, of which Perlman is a part, are responsible for both operations and recording the results of operations.
Because the team will benefit from a bonus, increasing earnings by ignoring the obsolete inventory is clearly a conflict of interest. Furthermore, such behavior is a discredit to the profession.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
6
Managerial Accounting, 13th Edition
Problem 1-4 (continued)
Credibility
• Communicate information fairly and objectively.
• Disclose all relevant information.
• Hiding the obsolete inventory impairs the objectivity and relevance of
financial statements.
(Unofficial CMA solution)
2. As discussed above, the ethical course of action would be for Perlman to
insist on writing down the obsolete inventory. This would not, however,
be an easy thing to do. Apart from adversely affecting her own compensation, the ethical action may anger her colleagues and make her very
unpopular. Taking the ethical action would require considerable courage
and self-assurance.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
7
Problem 1-5 (30 minutes)
1. See the organization chart on the following page.
2. Line positions include the university president, academic vice-president,
the deans of the four colleges, and the dean of the law school. In addition, the department heads (as well as the faculty) are in line positions.
The reason is that their positions are directly related to the basic purpose of the university, which is education. (Line positions are shaded on
the organization chart.)
All other positions on the organization chart are staff positions. The
reason is that these positions are indirectly related to the educational
process, and exist only to provide service or support to the line positions.
3. All positions would have need for accounting information of some type.
For example, the manager of central purchasing would need to know
the level of current inventories and budgeted allowances in various areas before doing any purchasing; the vice-president for admissions and
records would need to know the status of scholarship funds as students
are admitted to the university; the dean of the business college would
need to know his/her budget allowances in various areas, as well as information on cost per student credit hour; and so forth.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
8
Managerial Accounting, 13th Edition
Problem 1-5 (continued)
1. Organization chart:
President
Vice
President,
Auxiliary
Services
Manager,
Central
Purchasing
Vice
President,
Admissions &
Records
Manager,
University
Press
Dean,
Business
(Departments)
Manager,
University
Bookstore
Dean,
Humanities
(Departments)
Vice
President,
Financial
Services
(Controller)
Academic
Vice
President
Manager,
Computer
Services
Dean,
Fine Arts
(Departments)
Vice
President,
Physical
Plant
Manager,
Accounting
& Finance
Dean,
Engineering &
Quantitative
Methods
Manager,
Grounds &
Custodial
Services
Manager,
Plant &
Maintenance
Dean,
Law School
(Departments)
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
9
Problem 1-6 (30 minutes)
1. No, Charlie would not be justified in ignoring the situation. First, the
Statement of Ethical Professional Practice states that the management
accountant must “Regularly communicate with business associates to
avoid apparent conflicts of interest. Advise all parties of any potential
conflicts.” If J.B. insists on continuing the relationship with A-1, Charlie
has a responsibility to advise both the corporate counsel and WIW’s
Board of Directors.
Second, as the company’s controller, Charlie has a responsibility to ensure that the JIT approach is properly implemented. From the data given in the problem, it does not appear that A-1 Warehouse Sales is the
best or most dependable supplier available. Orders are late and not
complete, and there is no way to ensure proper quality because nearly
all orders are shipped directly from the manufacturer. The present arrangement with A-1 negates most of the benefits that can accrue
from JIT.
2. Charlie’s first step should be to verify the accuracy of his information.
He states that A-1’s markup is 30%, but he does not indicate how he
obtained this figure. Also, the adverse financial impact on WIW is dependent in part on the price it would have to pay directly to the manufacturers as compared to the price being paid to A-1. That is, can WIW
purchase directly from the manufacturers for the same price as given to
jobbers, who handle huge volumes of goods? If not, then the adverse
financial impact of buying through A-1 may, in fact, be very small because WIW may have to pay about the same price either way.
Charlie’s second step should be to discuss the potential legal ramifications on a confidential basis with WIW’s corporate counsel. Before meeting with the corporate counsel, Charlie may wish to discretely determine
if Tony, the purchasing agent, and J.B., the president, worked together
in their prior employment. (Remember that both have been with WIW
for five years.) Armed with the information obtained from the discussion
with counsel, Charlie should review the situation again with J.B., explaining more directly his concerns about the apparent conflict of interest and ask that the Board of Directors approve the continued use of A1 as a supplier.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
10
Managerial Accounting, 13th Edition
Problem 1-6 (continued)
If J.B. refuses to follow this course of action, Charlie’s only alternative is
to submit a memorandum to the Board of Directors. J.B. should be notified of this action in advance. The memorandum should present only the
facts. If the Board approves the continued relationship with A-1, Charlie
may possibly conclude that his concerns about an apparent conflict of
interest do not represent an actual conflict. This presumes that legal
counsel has advised the Board that the arrangement with A-1 does not
violate any laws and that the company has made adequate disclosures
in its public filings. Only Charlie can make the decision as to whether or
not he can continue at WIW under these circumstances.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
11
Problem 1-7 (20 minutes)
1. If all automotive service shops routinely tried to sell parts and services
to customers that they didn’t really need, most customers would eventually figure this out. They would then be reluctant to accept the word
of the service representative that a particular problem needs to be corrected—even when a real problem exists. Either the work would not be
done, or customers would learn to diagnose and repair problems themselves, or customers would hire an independent expert to verify that the
work is really needed. All three of these alternatives impose costs and
hassles on customers.
2. As argued above, if customers could not trust their service representatives, they would be reluctant to follow the service representative’s advice. They would be inclined not to authorize work even when it is really
necessary. And, more customers would learn to do automotive repairs
and maintenance themselves. Moreover, customers would be unwilling
to pay as much for work that is done because customers would have
reason to believe that the work may be unnecessary. These two effects
would reduce demand for automotive repair services. The reduced demand would reduce employment in the industry and would lead to lower
overall profits.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
12
Managerial Accounting, 13th Edition
Problem 1-8 (30 minutes)
1. Line authority is directly related to the achievement of an organization’s
basic objectives. Line managers have formal authority to direct operations.
Staff assists line management in the achievement of an organization’s
basic objectives. Persons with staff authority provide support services.
Staff managers typically have advisory authority because of their particular expertise.
2. Mark Johnson’s responsibility for maintaining the production schedule
involves line authority. Johnson would be directly concerned with meeting the company’s primary objective of producing metal parts.
Johnson’s responsibility to consult with production supervisors is a staff
role because he apparently cannot order changes in those consultations,
he can only advise. Johnson’s supervision of new alloy testing and his
role regarding the use of new alloys in product development is basically
a staff function as well. He has limited authority regarding the use of
new alloys because his authority applies only to product development
and not to production.
3. Mark Johnson may experience several conflicts because he has been
given both line and staff authority.
First, Johnson may initially find it difficult to communicate with the production supervisors because he operates out of a staff position.
Second, a conflict could easily develop if the supervisors lack a clear understanding of Johnson’s responsibilities and authorities. The supervisors could resent apparent staff interference and refuse to discuss their
problems with Johnson, making the meetings fruitless. The supervisors
working on the new contract may fail to perceive Johnson’s line authority and refuse to follow his orders.
Third, Johnson might have difficulty in understanding the nature of his
position and job. Johnson might also find it difficult to distinguish between his staff capacity and line capacity. For instance, Johnson might
have difficulty in remaining objective if any production problems develop
in the alloys he tested.
(Unofficial CMA Solution, adapted)
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
13
Research and Application 1-9
1. Whole Foods Market succeeds first and foremost because of its product
leadership customer value proposition. The first boldface heading in the
company’s Declaration of Interdependence says “We Sell the Highest
Quality Natural and Organic Products Available.” Page 4 of the 10-K/A
indicates that the real source of the company’s product leadership position centers on perishable products (e.g., produce, dairy, meat, seafood,
bakery, and prepared foods). Perishable product sales account for about
67% of total retail sales. Customers choose Whole Foods Market primarily because they are able to buy better natural and organic foods
and higher-quality perishable products than in conventional supermarkets.
Customer service is also an important part of Whole Foods Market’s success, but it is secondary in importance to product quality.
2. Whole Foods Market faces numerous business risks as described in pages 11-15 of the 10-K/A. Here are four of the more prominent risks with
suggested control activities:
 Risk: Customers will defect to conventional supermarkets that are beginning to stock more natural and organic foods. Control activities:
Whole Foods Market can expand its selection of product offerings, particularly perishables, and continue to invest heavily in employee training
and retention so that it offers market-leading levels of informed customer service.
 Risk: Growth targets will not be realized due to failed new store openings. Control activities: Implement formal reviews of the sight selection,
construction, and new employee hiring and training processes.
 Risk: Adverse economic conditions could reduce consumer spending at
retail locations. Control activities: Continue to develop private label
product categories, such as the 365 Everyday Value category mentioned
on page 8 of the 10-K/A, which are less expensive but meet rigorous
quality standards.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
14
Managerial Accounting, 13th Edition
Research and Application 1-9 (continued)
 Risk: Extended power outages could cause severe inventory losses because of the company’s emphasis on perishable products. Control activities: Implement a contingency plan that specifies responses in the event
of a power outage.
3. There are no absolute right and wrong answers to this question because
the information available in the annual report is piecemeal. Nonetheless,
students could make the following observations based on available information. First, the CEO (John P. Mackey) has a layer of senior managers that report to him including two Co-Presidents/Chief Operating Officers, and three Executive Vice Presidents. Second, there are ten Regional Presidents. In the organization chart shown below, we assume
that the Regional Presidents report to the Chief Operating Officers.
Third, each Regional President has a layer of management that reports
to him or her. For example, the Global All-Stars include David Schwartz,
who is the Vice President of the Midwest Region. He would report to the
President of the Midwest Region. John Simrell is the Director of Finance
for the South Region and he would report to the South Region President. Robin Graf is the Team Member Services Director for the Southern
Pacific Region. She would report to the President of the Southern Pacific
Region.
Fourth, each region has a manager/coordinator for each product category. For example, Theo Weening is the Meat Category Manager for the
Mid-Atlantic Region and Bobby Turner is the Bakery Coordinator for the
Midwest Region. In the organization chart shown below, we assume
that these regional managers/coordinators report to a Vice-President at
the regional level. Fifth, each region has Store Team Leaders for each
retail location within the region. For example, John Robertson is the
Store Team Leader in Charlottesville, Va. We have assumed that the
store team leaders report to the regional vice-president level. Finally,
each store location has various team leaders that report to the store
team leader. For example, Rolando Alas is the Produce Team Leader at
the Mill Valley Store location.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
15
Research and Application 1-9 (continued)
Based on insights such as these, students should be able to prepare an
organization chart that resembles the one shown at the end of this solution.
The Global All-Stars include numerous line and staff employees. Three
staff employees are Roberta Lang, General Counsel, Chris Pine, Vice
President of Real Estate, and Jennifer McFarlin, Payroll Benefit Specialist, Madison. Three line employees are Rocco Terrazano, Meat Team
Leader, Yorkville, Don Hosfeld, Grocery Team Leader, Ft. Lauderdale,
and Joel Leonard, Prepared Foods Team Leader, Fresh Pond.
4. Both documents emphasize that the respective companies serve a broad
range of stakeholders (e.g., customers, employees, suppliers, communities, and stockholders). Both companies mention that their most important stakeholder is the customer. The first sentence of the Johnson &
Johnson Credo says “We believe our first responsibility is to the doctors,
nurses, and patients, to mothers and fathers and all others who use our
products and services.” Whole Foods Market says “Our customers are
the most important stakeholder in our business. Therefore, we go to extraordinary lengths to satisfy and delight our customers.”
The Whole Foods Market Declaration of Interdependence explicitly recognizes that satisfying all stakeholders’ interests will require balance and
making trade-offs. In fact, the company says “One of the most important responsibilities of Whole Foods Market’s leadership is to make
sure the interests, desires and needs of our various stakeholders are
kept in balance… Any conflicts must be mediated and win-win solutions
found.” The Johnson & Johnson Credo does not explicitly acknowledge
the need to strike a balance when managing the needs of its various
stakeholders.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
16
Managerial Accounting, 13th Edition
Research and Application 1-9 (continued)
5. Whole Foods Market’s mission statement differs from its Code of Conduct and Ethics in three important respects. First, the mission statement
sets forth goals that the company strives to achieve. The tone of the
document is positive because it focuses on goals the company hopes to
achieve. The Code of Conduct and Ethics defines prohibited conduct.
The tone of the document is appropriately negative because it describes
those behaviors that are “out of bounds.”
Second, the mission statement refers to a broader set of stakeholders
(e.g., suppliers, customers, and communities) than the Code of Conduct
and Ethics, which pertains primarily to Whole Foods Market Team Members and Directors. Third, the mission statement is values-based. It reflects a vision of what the company stands for. The Code of Conduct
and Ethics is rule-based. The majority of the code is based on the rules
of governing bodies such as the Securities and Exchange Commission
(SEC), the Nasdaq stock exchange, and the Financial Accounting Standards Board (FASB).
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 1
17
Research and Application 1-9 (continued)
Chairman
& CEO
Executive
VP & CFO
Executive VP
of Growth
and Bus. Dev.
President,
South Region
President,
Midwest Region
Director of Finance
– Florida Region
Produce
Coordinator
– Florida
Region
Co-Presidents
& COOs
Store Team Leaders
– Other Florida
stores
Ft. Lauderdale Produce
Team Leader
President,
Florida Region
VicePresident(s) –
Florida Region
Meat
Coordinator –
Florida Region
Executive VP
of Global
Support
Presidents,
Other Regions
Director of Team
Member Services –
Florida Region
Bakery
Coordinator
– Florida
Region
Store Team Leader
– Ft. Lauderdale
store
Ft. Lauderdale
Seafood Team
Leader
Whole Body
Coordinator
― Florida
Region
Store Team Leaders –
Other Florida stores
Ft. Lauderdale Other
Category
Team Leaders
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
18
Managerial Accounting, 13th Edition